J A Y B . B A R N E Y

D E L W Y N N . C L A R K

( O X F O R D U N I V E R S I T Y P R E S S )

Resource Based Theory: Creating and Sustaining Competitive

Advantage (2007)

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Contents

I. Part 1: Resource- based theory (RBT)1. The strategic management question and the emergence of resource-based

theory2. Strategic factor markets and competitive advantage3. Firm resources and sustained competitive advantage

II. RBT and organizational capabilities4. Culture as a source of sustained competitive advantage5. Trust as a source of sustained competitive advantage6. Human resources as a source of sustained competitive advantage7. Information technology as a source of sustained competitive advantage

III. RBT and organizational strategies8. RBT and vertical integration9. RBT and corporate diversification10. RBT and mergers and acquisitions

IV. RBT: The research frontier11. RBT: empirical research 12. The future of RBT

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Plus critique of the book!

1. The strategic management question (1/5)

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The key question strategic management discipline attempts to answer is “why do some firms persistently outperform others?”

Two broad explanations exist:

1. Market power explanation (industry structureshapes a firm’s conduct, which defines its performance) (Bain, 1941; Porter, 1985; )

2. Efficiency explanation (few firms are better at meeting customer requirements more profitably than others) (Coo et al., 1989)

1. The strategic management question (2/5)

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The Resource Based View (or Theory in this book) has historical antecedent, including:

1. Distinctive competencies (qualities and characteristics that make a high-quality general manager, e.g. Institutional Leadership) (Selznick, 1957)

2. Ricardo’s analysis of land rents (economic consequences of original, unaugmentable and indestructible gifts of nature, such as land) (Ricardo, 1891)

3. Penrose (firm as a bundle of productive resources) (Penrose, 1959)

4. Anti-trust implications of economics (firms are better owing to luck or by addressing customer requirements; and not necessarily in a monopoly position) (Demsetz, 1973)

1. The strategic management question (3/5)

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Some of the early contributors of RBT are:

1. Wernerfelt (1984)- firms compete based upon resource positions they hold and barrier to imitate.

2. Rumelt (1984)- firm as bundle of productive resources, and protected by ‘isolating mechanisms’

3. Barney (1986)- strategic factor market where firm acquire or develop resources they need to implement their product market strategies

4. Dierickx and Cool (1989)- resources are subjected to time compression diseconomies, are causally ambiguous, and characterized by asset mass efficiencies

1. The strategic management question (4/5)

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Also there exist steams parallel to RBT, including:1. Accumulating and managing invisible assets, which are

hard and time consuming to accumulate, and where people are both accumulators and producers of such assets. (Itami and Roehl, 1987)

2. Core competence of a firm, which is ‘the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple stream of technologies’ (Prahalad and Hamel, 1990)

3. Other terms adopted are capabilities (Amit and Schoemaker, 1993; Makadok, 2001), dynamic capabilities (Teece, Pisano and Shuen, 1997)

1. The strategic management question (5/5)

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The aim of a good strategy is to help a firm achieve a competitive advantage, defined as

• An enterprise has a competitive advantage if it is able to create more economic value than the marginal competitor in its product market (p.24)

Also Barney (1991) identifies four types of resources:

1. Physical capital resources2. Financial capital resources3. Human capital resources 4. Organizational capital resources

Customer surplus

Produced surplus

Economic cost

Perceived benefit

Price

Cost

Va

lue

crea

ted

2. Strategic factor markets

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While most of the focus in strategy has traditionally been on product markets, or positioning (Porter, 1985), the authors suggest that an advantage in product market stems from a firm’s advantage in factor markets.

A strategic factor market is defined as ‘the market where the cost of resources used to conceive and implement a firm’s product market strategy is determined’ (p.32).

A firm can achieve an advantage on the following two conditions only:

• It has a superior insight about the future value of a resource or strategy, or

• It is plain lucky. Hence is firm’s differences in expectations constitute a strategy

factor market competitive imperfection.

3. Firm resources and sustained competitive advantage (1/3)

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The oft used analysis tool for firm analysis- SWOT analysis (Ansoff, 1965; Andrews, 1971) lacks the any method of identifying a firm’s strengths and weaknesses. Hence isn’t useful.

Authors propose a basic premise of sustained competitive advantage:Resource heterogeneity Immobility (of resources between firms)

Such an advantage must meet the following criteria;Consider not just current, but also potential competitorsIsn’t competed away by firms duplicating the strategy, at least in near future

3. Firm resources and sustained competitive advantage (2/3)

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The essential conditions that resources (and capabilities) of the firm must meet in order to offer a sustained competitive advantage are:

1. Valuable (firm’s resources and capabilities enable the firm to respond to environmental threats or opportunities)

2. Rare (resource is currently controlled by only a small number of competing firms)

3. Inimitability (firms without a resource face a cost disadvantage in obtaining or developing it, due to unique historical conditions, causal ambiguity, social complexity, and un-substitutability)

4. Organizational (firm’s other policies and procedures are organized to support the exploitation of its valuable, rare and costly to imitate resources)

3. Firm resources and sustained competitive advantage (3/3)

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Resource heterogeneity

Resource immobility

ValueRarenessImperfect imitability

History dependent

Causal ambiguity

Social complexity

Organization

Sustained Competitive Advantage

The antecedents of sustainable competitive advantage, as advised by the Resource Based Theory

4. Culture as a source of SCA

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Culture is defined as “a complex set of values, beliefs, assumptions, and symbols that define the way in which a firm conducts its business” (p.80)

A firm that has a valuable, rare, and imperfectly imitable culture enjoys a sustained competitive advantaged that reflects that culture.

5. Trust as a source of SCA

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Trust is something the economics researcher wish away with, while sociologists consider very vital.

Trust is defined as “a mutual confidence that no party to an exchange will exploit another’s vulnerability” (Sabel, 1993).

Types of trust are:1. Weak-form trust (limited opportunities for opportunism.

E.g. highly competitive commodity markets)2. Semi-strong trust (trust enforcement through governance or

social costs). Can be a source of SCA if competing exchange partners vary in skills and abilities in conceiving of and implementing governance mechanisms.

3. Strong-form trust (trust engrained in the culture and value system of the company). Strong-form trust is a source of SCA

6. Human resources as a source of SCA

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Three forms of human resource based SCA exist:

Firm specific versus generic skills

Teams versus individuals

HR systems versus single HR practices

HR executives have a key role in nurturing, developing, and managing the set of HR resources

7. Information Technology as a source of SCA

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Sources of SCA could include:

Customer switching cost

Access to capital (e.g. risk capital)

Proprietary technology

Technical IT skills

Managerial IT skills

Only managerial IT skills are likely to be source of SCA.

8. RBT and Vertical Integration

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One of the key questions in management is- what’s the boundary of the firm?

Transaction Cost Economics (Williamson 1975) helps define the boundary of the firm based upon following parameters:GovernanceOpportunismTransaction-specific investment

In order to overcome opportunism, TCE suggests the mechanisms of market governance, intermediate governance, and hierarchical governance.

However, TCE tends to ignore firm resources and capabilities in making vertical integration decisions.

Incorporating RBT in vertical integration could suggest that the cost associated with opportunism may be less than the benefits associated with gaining access to these special resources and capabilities (p.182).

9. RBT and Corporate Diversification

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Corporate diversification is one of the most studied phenomenon in strategic management.

One of the traditional logics explaining the phenomenon is –firms diversify to exploit its core competence (Prahalad and Bettis, 1986).

However, RBT suggests that diversification is an interplay between core firm resources, and human capital resources. Employees take a risk in investing in building firm specific human capital resources, fearing a opportunism by the company.

Hence, risk associated with core resources can be reduced by exploring the applicability of these core resources in other product markets and to diversify accordingly (p.197). Hence, corporate diversification is both the effect of core competence, and the cause of core competence.

10. RBT and Merger and Acquisition

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The financial definition of relatedness is that:

Two firms are related when the net present value (NPV) of the cash flow of the combination of these firms is greater than the sum of the NPVs of the cash flow of these firms acting independently. \

NPV (A+ B) > NPV (A) + NPV (B)

The RBT suggests that in a imperfectly competitive market for corporate control, relatedness doesn’t generate superior returns for bidding firms, rather synergistic cash flow will lead to superior return.

11. RBT: Empirical research

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The RBT suggests that the strategy has potential to be costly to imitate because of the nature of the resources that enable a firm to chose and implement its strategies (p.226).

The testing of RBT is mired with constraints such as:

Currently available typologies of firms are too broad in scope

Observability of resources and capabilities

Yet the theory has seen application in fields as diverse as MIS, entrepreneurship, marketing, operations management, and innovation management, apart from HR and management.

12. Future of resource based theory

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Some of the resolved issues are:Capabilities, dynamic capabilities, knowledge based, etc are all subsumed under the resource based theoryThe theory is not tautologicalSustained competitive advantage can be defined

However, the areas of future research could be:Applying quantitative case-study approachesCreating mathematical resource based modelsDelving into micro-dynamics of resource development (where do resources come from)Creating a dynamic resource based model answering- where are a firm’s resources going next?

Critique of the book

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Positives 1. Depicts the historical

antecedents of RBV2. Shares the contemporary

empirical studies on the topic

3. Explores competing explanation, while asserting why RBV is more appropriate

4. Attempts to explain existential questions in management though the lens of RBV

5. Chapter on trust is really insightful

Negatives 1. Lack of fresh examples2. Belabors the same point

over and over again3. No clear difference between

Culture (Ch.4) and Human Resources Practices (Ch.6) as sources of SCA

4. Isn’t RBV failing the test of falsifiability of a theory (Popper, 1959)? Isn’t it claiming to explain everything?

5. The explanation of corporate diversification, and M&A through the lens of RBV isn’t compelling.